Video game developer and publisher, Electronic Arts Inc. (ERTS), also popularly known as EA, plans to launch its first online service, Origin. Through this service the company plans to sell its downloadable titles directly to customers.
Electronic Arts is launching the Internet-based service with more than 150 of its titles. Electronic Arts has developed its online service with social networking features similar to sites like Facebook, where the gamers can record their achievements and subsequently broadcast them to their online friends.
Origin enables customers to purchase games or download its content pack and subsequently keep a track of games available for PCs, such as “Battlefield” combat and “Need For Speed” to name a few.
The decision to go online and focus on the digital segment might have been prompted by the company’s performance in the preceding quarter. In the prior quarter, 26.9% of Electronic Arts’ revenues came from the digital segment, which was up 71.8% on a year-over-year basis. This jump was primarily driven by growth in mobile and other handheld revenues and downloadable content (DLC).
DLC and free-to-play micro transaction content was $113 million in the prior quarter, up almost 200% year over year.
Also, revenues from company’s core business of sale and distribution recorded sluggish growth.
Another possible reason for Electronic Arts to jump onto the digital bandwagon is the upcoming online release of the much-hyped Massively Multiplayer Online Game (MMO) "Star Wars: The Old Republic”. This highly anticipated game is slated to release this year and EA plans Origin to be the only Internet-based service to offer the "Star Wars" game. The game is expected to give its online service an instant recognition among EA fans. The game will also be available in stores.
We have witnessed a shift in gamers’ preferences to the digitized format. The demand for “apps” for mobile devices such as Apple Inc.‘s (AAPL) iPad and online social games have been changing the gaming industry rapidly. Although consumers continue to buy games that can be downloaded to consoles or computers; digital downloads, used game sales and game rentals are gaining popularity. We think that EA is better equipped than many new players to gain traction in the digital format with its variety of titles and massive fan following.
We believe that the high quality titles, impressive product line, increasing exposure to online and social games and diversification of portfolio are likely to generate market share gains over the long term.
However, cut throat competition from Activision Blizzard Inc. (ATVI), Take-Two Interactive Software Inc. (TTWO) and from social network company Zynga, may act as a headwind going forward.
We have a Neutral recommendation on Electronic Arts over the long term (for the next 6 to 12 months). Currently, Electronic Arts has a Zacks #3 Rank, which implies a Hold rating in the short term.
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